Hog weakness less clear past surface, while cattle aims lower

Hogs: Through Wednesday's run, the current kill is 79,000 head smaller than last week at this time. While you would expect some decline, as packers were making up for the Good Friday slowdown last week, this does reflect an artificially small number. Ice and snow lowered the South Dakota run. On top of that, the JBS Worthington, Minn., plant canceled both of its shifts Wednesday due to power outages. Along with weather issues, wholesale pork prices have not been able to keep up with the rally in cash hogs. In fact, none of the cash hog rally was made up for on the pork end.

Along with these short-term bearish issues, USDA raised its 2013 pork production estimate on Wednesday’s supply/demand report by 130 million lbs. Their pork export number was reduced by 160 million pounds. These are the bearish facts at face value so far. Now, let’s bring some common sense to this info.

We cannot discount the slowdown in slaughter this week. It is disappointing. However, we must point out the number of hogs showing up to the plant since March 1 has not met the recent Hogs and Pigs report numbers. If we are not meeting them now, perhaps they will also be short in the coming weeks. Second, USDA’s pork production increase is just a reaction to the Hogs and Pigs report. Their estimate, of 1.1% higher than last year, has already been traded in the market. The third issue here, pork exports, is also not as bad as would seem. USDA’s new export number is only 3% smaller than last year. Heck, the January and February numbers we have in hand are 14% lower. In other words, USDA expects the recent poor export pace to actually improve. At face value, we fully admit there are negatives in this market. Digging deeper into the actual facts here. we are not finding much to be panicked about.

There is one thing remaining here that does need to change to turn this market around: wholesale pork. We are not going to get that end lifted until the seasonal drop in supplies really takes hold (in the second half of the month). If that can happen, it would trigger a head-and-shoulders bottom formation on the charts. We will not go long futures until that formation is triggered (a close above 93.60)…Rich Nelson

Cattle: Cash cattle prices traded at $127 today. That was $1 to $1.50 lower than last week and likely confirms the spring high we have discussed here. A normal drop in prices, from the $128 spring high, would imply $113 summer lows. Summer futures are a full $7 over that price right now!

On Friday, we recommended cattle feeders to get cattle that will be marketed through September hedged up. That should be done. We have serious concern about downside prices in the next few months. Last night, we noted the only hole in our bearish summer theory.

Typically, major price moves require the help of managed money -- the funds. In recent weeks their net long position has been a puny 1,000 to 13,000 contracts. Normal for them is a net long of 40,000 to 60,000 contracts. To get our downside target reached, you would need to see them move to a net short position. That is a rare position…Rich Nelson

About the Author

Rich Nelson is Director of Research at Allendale, Inc. in McHenry, IL. Allendale is registered with the CFTC and NFA and is a member of the NIBA. www.allendale-inc.com.